Wider U.S. air bag recalls could cost Takata Corp.
several billion dollars to clean up, imperiling the Japanese company’s pursuit of being the No. 1 player in an automotive safety supply chain driving much of the world’s autonomous vehicle development.
Takata has agreed with U.S. regulators to double the number of vehicles targeted by the recall. With the action growing to cover nearly 34 million vehicles in the U.S., some analysts expect the company’s recall costs could more than triple, nearly equaling a full year’s revenue.
Shares of Takata fell 10% in Tokyo on Wednesday. The company said it would boost the production of replacement parts needed to meet the requirement of the largest recall in the auto industry’s history, covering 14% of the 250 million vehicles estimated to be on American roads.
Valient Market Research Chief Executive Scott Upham, who once worked at Takata, said the supplier could face recall-related charges of between $4 billion and $5 billion, far outpacing the current $1.6 billion recall-cost estimate. The top end of his estimate is near the ¥642 billion ($5.3 billion) in sales Takata reported last fiscal year.
“The amount depends on future discussions with auto makers,” Takata spokesman Hideyuki Matsumoto said. “We can’t make reasonable estimates at the moment.”
The cost to replace one faulty air-bag inflater is somewhere between $100 and $150, according to auto-safety industry experts. To date, those costs have been jointly shouldered by auto makers and Takata. But with the wider recall and Takata’s new acceptance that a defect in its product exists, the stage is set for new discussions with Honda Motor Co.
, Fiat Chrysler Automobiles
NV, BMW AG
and others on how to split costs for recent recalls.
The increased costs come as rivals, such as Sweden’s Autoliv Inc.
and Germany’s ZF Friedrichshafen, are using capital to expand portfolios of safety components. They are acquiring companies with the engineering prowess needed to develop cars that are increasingly capable of piloting themselves.
While established auto makers and a patchwork of outsiders are racing to produce viable autonomous vehicles, auto suppliers are the companies largely controlling the pace of innovation. Suppliers, including Michigan-based Delphi Automotive PLC,
are spending on engineering increasingly complex safety systems.
They are marrying traditional components, such as brakes or steering wheels, to sensors or cameras to make cars smarter. Even though air bags remain sophisticated and that area of the parts business is made up of only a few players, most air bag makers see diversifying their offerings as a top priority.
Takata recently became the first company to launch commercial production of what it calls an “active steering wheel,” technology that adapts the steering angle according to driving speed. It is working on sensors to detect if a driver is properly using the steering wheel.
Takata has said it may need to pursue acquisitions to keep up in this race. ZF last year agreed to buy U.S. safety supplier TRW Automotive for $13.5 billion, giving it a better position in safety. Autoliv Chief Executive Jan Carlsson recently said he has been unable to find ready sellers, and is boosting in-house research and development.
Much larger than Takata in terms of revenue, Autoliv will boost research and development spending to 6.5% of sales. In contrast, Takata’s R&D spending as a percentage of sales in fiscal year ending Mar. 31 was 3.8%, according to its annual financial statement.
Takata’s cash and equivalents at March 31 was ¥75.7 billion ($624 million), down from ¥105.4 billion a year ago. Capital surplus was at ¥42.3 billion.
“It’s not going to run out of these immediately but the cash flow is very tight and it may need bank support,” said Koji Endo, an analyst at Advanced Research Japan.
Recall expenses include manufacturing replacement parts and repaying car makers for costs such as the time dealers spend fixing vehicles. Takata is likely to spread charges out over several years to stay afloat, Valient’s Mr. Upham said.
Takata, which also makes seat belts and child seats, already has booked full-year net losses twice over the last three years. In that period, it has posted at least $700 million in recall-related charges.
Takata this month said it expects to return to profit this fiscal year and forecast about ¥7 billion in recall-associated expenses, mainly payments to lawyers and consultants.
The recall crisis—and its potential costs—are likely to linger for years to come. Class-action lawsuits have been filed against Takata in the U.S. and Canada, the company says, while the industry and government probes into why air bags are exploding too forcefully are still likely to take months, if not longer.
The reason the future cost to Takata remains unclear lies with the company’s approach to air bag recalls, which started in 2008. Until the middle of 2014, Takata had acknowledged its air bags were defective due to manufacturing problems, making the accounting of the recall costs clear between Takata and auto makers.